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Demonetisation Alone Can't Turn Agricultural Markets Cashless -Nidhi Aggrawal and Sudha Narayanan
-TheWire.in

A large chunk of India’s farmers continue to depend on commission agents and not formal institutions for credit, thereby relying on cash.

It is now official. Demonetisation has led to an implosion of agricultural trade in the country. In the week following demonetisation, soyabean arrivals in select major states had collapsed by 87% relative to average arrivals over the week preceding demonetisation. The figures were 55% for paddy, 61% for guar, 51% for maize, 38% for tur and 23% for cotton. Last year, for a comparable span, such effects are largely absent. As one would expect, these effects are muted for perishable commodities. Cabbage, cauliflower, tomato and brinjal arrivals have fallen by 9% to 19%. Farmers with commodities that perish are more likely to offload their produce at deeply discounted prices or on credit, as long as the net benefits of doing so are higher than letting produce rot on farms.

Our research suggests that by the end of the second week, there are few signs of recovery. Paddy arrivals over the second week after demonetisation were 61% lower than in the week preceding demonetisation, comparable to the fall in the first week. For commodities such as soyabean and maize, the arrivals were lower by 76.52% and 28.85% respectively. The decline, even though lower than in the first week following demonetisation, cannot be interpreted as a sign of recovery for two reasons. First, farmers, who cannot afford to store the produce any longer have no choice but to bring the produce to the mandi and sell at either lower prices or on credit. The higher arrivals in the second week relative to the first week could, in part, reflect this. Second, for the actual recovery, reduced arrivals in the first week should show up as higher arrivals in the second week for the markets to get back on track. We do not see this trend yet in the data. This suggests perhaps that the concessions to farmers and traders at the agricultural produce market committees are yet to find traction. The impact on prices at the mandis is as yet unclear, although reports suggest a dampening consumer prices. Another striking feature is the significant variation in the impact across states. For example, aggregated soyabean and maize arrivals across mandis in Madhya Pradesh fell by about 97%. In contrast, aggregated soyabean arrivals in Maharashtra fell by 68%. Our hypothesis is that mandis that trade mostly in cash or have limited penetration of banks and are relatively less connected to urban areas are likely to be more affected. It is possible that transitions to bank payments reported in several states will aid the recovery process, but only time will tell.

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